The local development finance team @UNCDF aims to be a centre of excellence for local government finance and local economic development finance, we have created a coalition with United Cities and Local Government for a global financial ecosystem that works for cities and local governments. This blog tells the stories that inspire our work.
International Municipal Investment Fund – Technical Assistance Facility
Welcome to another local government finance blog from United Nations Capital Development Fund. This is the third of three blogposts leading up to the November 5th meeting of Finance ministries, Central Bankers, and Local Governments from a group of developing countries that are members of the Local Finance Initiative (LFI). The meeting will discuss strengthening domestic capital markets and promoting investment in local economic development by domestic banks.
Today’s post is on financing urbanization. The previous two posts looked at financing local economic transformation and at how the Local Finance Initiative applies spatial economics to finance at the (real) frontiers.
On the 75th anniversary of the United Nations it is useful to reflect on the changed demographics of the world and the type of financial arrangements and institutions that are now required. When the UN began the world was predominatly rural with only 30% of people living in urban areas. By 2010 we reached a 50/50 share. Today around 66% of us live in towns and cities – a complete reversal of the situation at the founding of the United Nations.
This reality required a refreshed development paradigm and innovative financial thinking. In 2016 the New Urban Agenda was adopted at the United Nations Conference on Housing and Sustainable Urban Development (Habitat III) in Quito, Ecuador. It was endorsed by the United Nations General Assembly in December 2016. UNCDF shared its reflections on development financing and cities in the New Urban Imparative for Secondary Cities and increased its capacity in local infrastructure finance. UNCDF and UNDESA also published best practice case studies in Financing Sustainable Urban Development in the Least Developed Countries. In 2018 UNCDF began working with development finance institutions and United Cities and Local Governments (UCLG) in the Malaga Coalition for a global financial ecosystem that works for cities and local governments.
The Malaga Coalition partners agreed that a dedicated local government friendly investment fund would contribute to the goals of the coalition by making capital available at the right price and in the right format for local investments with high impact. Such a fund would also contribute to policy and regulatory reform through demonstration investments that could be replicated by others, particularly in co-financed with domestic financial institutions. At the UCLG congress in Durban, November 2019 it was announced that Meridiam was selected as the Fund Manager for the International Municipal Investment Fund.
In January 2020 UNCDF launched the prospectus for the Technical Assistance Facility for the IMIF (IMIF-TAF) and provided some initial funding to enable work to begin on the IMIF pipeline. Thanks to the generous support of Sweden and Switzerland (through the BluePeace initiative) the IMIF – TAF is now operational. It uses UNCDF’s local development finance “dual key” pipeline management and the Local Finance Initiative investment structuring capacity. The LFI Board will discuss the progress on both investment structuring and regulatory reform.
IMIF TAF also offers technical support to prepare the policy and
regulatory environment for municipal finance. In summary, it supports cities and local governments in the following areas:
Capacity Strengthening: Support for local governments to promote local economic development, economic analysis, planning and capital investments; capacity support to investment projects on business plan development, financial modeling and other tools;
Enabling Environment: Policy, legislative and regulatory support to central and local government authorities to promote local economic development finance and local capital markets including technical support to mechanisms such as project finance and domestic bond markets;
Pipeline of Revenue Generating Investments: Support to projects in catalytic sectors that address the urbanization and climate imperative, add value to local economies and provide proof of concept to market regulators, domestic financial institutions, commercial banks, and international financiers. “Dual Key” Pipeline and Local Development Investments
Development work should not be paused due to COVID-19, rather, development institutions need to focus on a way to work with certain restrictions in place. Despite COVID-19, the technical team of the IMIF TAF have started working on project preparation in the target cities. For areas where UNCDF does not have geographic presence, or in unable to physically be present its partners, a considerable amount of work is being undertaken virtually. Project preparation work does have some dependency on the need to be physically present, however, a considerable amount of work can be completed virtually. The team is working on developing these project, so that once travel restriction are lifted, we would be able to send our technical teams to fill any gaps which require physical presence on the ground.
Some cities that have been involved in this process so far include
Freetown, Sierra Leone
UNCDF is in partnership with Freetown City Council (FCC – the municipal government of the city of Freetown, the capital of Sierra Leone, established in 1893) to enable its access to market financing for its development plan “Transform Freetown”, thereby contributing to transforming the City of Freetown for the benefit of Freetown’s residents. UNCDF and FCC will partner through the Blue Peace Financing initiative set up within the framework of UNCDF partnership with the Swiss Agency for Development and Cooperation and Geneva Water Hub.
Freetown is Sierra Leone’s capital city and the seat of government. It is the largest city in Sierra Leone and the engine of Sierra Leones economy, creating 30% of the country’s GDP despite housing only 15% of its population, and occupying less than 0.5% of the national land mass. With over one million residents, and a growth rate of 4.2% per annum, Freetown’s population is expected to double by 2028
The municipality of Chefchaouen seeks to modernize its public lighting system.
It has an estimated population of over 45,000 inhabitants and has a public lighting network with an estimated length of 105 kilometers, serving 3,534 lighting points controlled by 51 electrical cabinets totaling an estimated installed power requirement of 530 KW.
By upgrading the public lighting to energy efficient light emitting diode (LED) bulbs, which can be up to 90% more energy efficient than incandescent and mercury light bulb, the city can realize cost saving from lower energy consumption and reduced maintenance and operational costs.
To realize these financial benefits, an upfront cost of the upgrade is required with a high cost per unit. LED upgrade of public lighting does not only increase luminosity but are also more climate friendly that their tadeonal counterparts due to longer lifespans and improved efficiency.
UNCDF has initiated the project with the municipality and some of the areas of the engagement cover:
Review of the current status of the available public lighting system to have an updated technical study.
Financial analysis of the project and the city to understand the debt carrying capacity of the city and a due diligence on the quality of revenue generated by the city to cover debt obligation.
Revise the actual cost of the project – estimated at 1.3 million Euro – to reflect current market pricing.
Since the project does not generate revenue this means that revenue risk is managed by the city. The team is structuring a mechanism to legally ring-fence municipal revenue to service the debt obligation.
The Kumasi Metropolitan Assembly (KMA) seeks address the issue of lack of available parking in the city and to redevelop an existing market. These are two priority areas identified by the KMA that require support. It may be worthwhile to note that Kumasi is the second largest and fastest growing city in Ghana. The issues of congestion and lack of available parking is hindering the ability to properly manage the growth of the city.
Development of a multi-story parking lot: Seeks to create room for an efficient movement of people, good and services in and out of the city center, by developing a centralized parking lot with the capacity for 2,500 vehicles. This will reduce the on-street parking facilities which currently clog 88% of the Central Business District.
Redevelopment of the Afaso market: Seeks to redevelop the market into a modern market with 988 retail spaces and additional support services needed..
UNCDF has initiated the project with the municipality with the end goal of a fully funded and constructed project which is operational. Some of the areas of the immediate engagement covers:
Economic Implication Analysis
Environmental and Social Analysis
Project Finance Model
Demand Risk Assessment
Legal and Tax Review
Kumasi, population 2.5 million, is the capital of the Ashanti region, a formerly independent kingdom pre-dates the formation of Ghana by 100 years. The city has a rich cultural heritage that is particularly evident in smaller surrounding towns. Trade, textiles, farming and mining are leading industries in Kumasi. It is among the largestmetropolitan areas in Ghana.
Agua Granda, Sao TomeSão Tomé is the capital and largest city of the Central African island country of São Tomé and Príncipe. Its name is Portuguese for “Saint Thomas“. Founded in the 15th century, is one of Africa’s oldest colonial cities.
Poi Pet, Cambodia
The current pandemic means that Cambodia is keen to accelerate its economic integratation with its neighbours and diminish its relieance on global value chains. Poi Pet, on the border with Thailand, expanded from 43,000 inhabitants in 1998 to 90,000 in 2008 and over 140,000 today. Vehicle parts manufacturing in Poi Pet is supplied by cheap electricity from Thailand. The long closed international rail link was re-established in 2018. The local government in Poi Pet is struggling to keep pace with the rapid increase in waste.
The government and UNCDF are working on an innovative Public Private Partnership for a $30m waste to energy project in Poi Pot which will simultaneously fix the waste problem and generate power for the expanding economy. This uses incineration with energy recovery technology and is expected to have an annual waste processing capacity of 50,000 tons and an electricity generation output of 25,000 MWh per year. The plant will also supply steam for nearby processing industries. The financial structuring includes creative solutions that build on the border location.
Bangladesh’s rapid urbanization has incentivized UNCDF to pilot its Municipal Investment Financing (MIF) programme and to develop financing instruments, such as Public Private Partnerships and Municipal Bonds, that diversify and aggregate municipalities’ financial base beyond annual grants provided by the central government.